A Delaware judge gave HealthSouth Corp. shareholders a victory last week when he directed the rehabilitation company to remove several long-standing board members and convene a long overdue shareholder meeting.
Five HealthSouth directors have agreed to resign and the company has promised to hold an annual meeting within 60 days of receiving its next audited financial statements, under a negotiated settlement with the Teachers' Retirement System of Louisiana, a $10.5 billion pension plan with stock in HealthSouth. The settlement ends the pension plan's lawsuit over the scheduling of a shareholders meeting but does not affect its ongoing suit against HealthSouth founder and former Chief Executive Officer Richard Scrushy and the company's directors, who were at HealthSouth's helm during an alleged $2.7 billion accounting fraud scandal.
The Louisiana pension plan contends the board members financially rewarded former company officials who have since pleaded guilty to fraud for their financial misconduct. The group asked the court to force HealthSouth to convene a shareholder meeting. Under Delaware law, corporations are required to hold such meetings every 13 months. HealthSouth, which is incorporated in the state but based in Birmingham, Ala., has not held one for 18 months.
Leo Strine, vice chancellor at the Delaware Chancery Court in Wilmington, told attorneys for the pension plan and HealthSouth that he was preparing to issue-but had not yet done so-an opinion ordering the annual meeting early next year, to give HealthSouth officials time to act on his recommendations.
"He signaled that HealthSouth would lose and said he would give the company some time to sort it out themselves," said Stuart Grant, a partner in the law firm Grant & Eisenhofer, which represented the fund. Grant told Modern Healthcare that the shareholders will have the best of both worlds.
"We have a new board without conflicts of interest to run the company, and we have a company with management who doesn't have to worry about proxy management and can stay focused on HealthSouth's restructuring," he said. "There's greater accountability now for the board."
HealthSouth said two directors will resign Dec. 15, two more on April 15, 2004, and the last on Aug. 30, 2004. Interim Chairman Joel Gordon will keep his director's seat, as will interim CEO Robert May, Jon Hanson and Lee Hillman, all of whom joined HealthSouth after the company began experiencing financial problems last year.
The board will decrease to nine from 10 individuals, and the Teachers' Retirement System will join up to three other major institutional investors, yet to be selected, in the search for four new directors. HealthSouth said the search would begin immediately. Company officials added that Gordon and May have agreed to continue until the board believes the company's turnaround "is largely accomplished and a permanent management team is in place."
Leaving the HealthSouth board are: John Chamberlin, C. Sage Givens, Charles Newhall III, Larry Striplin and George Strong. All have been members since at least 1999 and all five are leaving voluntarily.
Strong has been on the HealthSouth board since its inception in 1984 and Givens and Newhall since 1985. Striplin, a longtime friend of Scrushy's, earlier this year stepped down from two board committees-one was assigned to investigate shareholder lawsuits and the other set Scrushy's salary-over conflict of interest issues.
Striplin's company, Nelson-Brantley Glass Contractors, won a $5 million contract to in-stall glass at HealthSouth's new digital hospital in Birmingham.
In congressional hearings in October, subpoenaed board members testified they did not know or suspect that fraud was being committed at HealthSouth until allegations became public in March.
Last week, U.S. District Judge Karon Bowdre set a new date of Feb. 2 for Scrushy's criminal trial, according to documents filed with the U.S. District Court in Birmingham.